May 12, 2014

28 Sherman has been working on his hunch that the central stringpuller in the American government-financial system over the last 20 years has been Robert Rubin, who went from Goldman to Clinton's second Treasury Secretary to an ill-defined job at Citi, for which he was paid $126 million.

A lot of other recent Treasury secretaries seem to have ties to Rubin, such as Larry Summers and the current one Jack Lew, who was COO at Citi. The previous Treasury secretary was Timothy Geithner, who has a book out.

One of the themes in "Stress Test" is Mr. Geithner's difficulty in understanding the health of large financial firms. He admits that he didn't see the mortgage crisis coming and didn't grasp the severity of the problems after it appeared. He didn't require that the banks he was overseeing raise more capital because his staff's analysis couldn't foresee a downturn as bad as the one that occurred.

None of this is particularly surprising in a man who, at the time he became president of the New York Fed, had never worked in finance or in any type of business—unless one counts a short stint in Henry Kissinger's consulting shop.

At Dartmouth, Mr. Geithner "took just one economics class and found it especially dreary." After three years at Kissinger Associates, he spent 13 years at the Treasury Department, becoming close to both Robert Rubin and Larry Summers, and then worked at the government-supported International Monetary Fund. Messrs. Rubin and Summers recommended him to run the New York Fed. "I felt intimidated by how much I had to learn," he writes of taking up the job in 2003.

Mr. Geithner's New York Fed was the primary regulator for Citigroup, where Mr. Rubin was a director. Although a former senior executive at the bank had warned Mr. Geithner that Citigroup was "out of control," and the staff at the New York Fed "always considered [Citigroup] a laggard in risk management," Mr. Geithner figured it wasn't as risky as many of the non-banks that didn't hold insured deposits. Looking back now, he concludes that "Bob Rubin's presence at Citi surely tempered my skepticism, and he probably gave Citi an undeserved aura of competence in my mind." Citigroup would require a series of taxpayer bailouts after it had been allowed to hide more than $1 trillion in risky assets outside its balance sheet. Mr. Geithner admits that "it wasn't as well capitalized as we thought."

Mr. Geithner was perhaps a natural choice to be Barack Obama's Treasury secretary, given how many Rubin and Summers associates were populating the administration. In his new job, he continued to promote his no-haircuts-for-creditors principle and even helped codify a plan for the largest firms to avoid bankruptcy if regulators believed their failure could be damaging to the financial system.

Mr. Geithner scoffs at what he calls the "moral hazard fundamentalists" and "Old Testament" types who worry that bailing out financial firms will encourage even riskier behavior. He says that the financial rescue programs enacted in the crisis years were a success because the alternative—which no one can ever know—would have been far worse. What we do know is that, six years later, the economy is suffering through a historically weak recovery and the emergency programs haven't ended. The Federal Reserve is still providing easy credit for banks and for the U.S. government, which has racked up more than $8 trillion in additional debt since the end of 2007.

I think it's interesting to compare Rubin to his predecessor in the long transition to the Wall Street Uber Alles economy, Michael Milken. Back in the 1980s, Milken was the man with a plan, but government just didn't play that big a role in it. I suspect that Milken made a big mistake by moving in 1978 from the East Coast back home to Encino, CA, while Rubin has merely shuttled back and forth between NY and DC. Moreover, Milken was kind of odd, crass, pushy, and didn't have great hair like Rubin. Milken thought he had enough pull, but he ultimately went to prison.

Since Milken got out of prison a couple of decades ago, he's learned his lesson to butter up politicians and the media. Milken's Davos Jr. conference every April in Beverly Hills doesn't get your heads of state like Davos does, but it does get your Tony Blairs, Al Gores, and current governors of California.

I saw Geithner give a speech last year and he said he was faced with people who wanted to nationalize everything (the liberals) and others who wanted to let everything fail (libertarians/conservatives). He said the right approach was in the middle. He seemed bright but not overwhelmingly impressive.

The perfect America 2.0 regulator. Well connected/elite background, not nearly smart enough to understand the stuff he's supposed to be in charge of, and a total suck up to the real big money guys who he almost hero worships, and assumes they are competent masters of the universe because a. They're rich so they have to be smart and b. They're on the right team with regard to social issues. He let the banks do whatever they wanted, and made us pay for it.

"Rubin was just a blank sheet of paper. John Podesta was the man calling the shots."

I don't know the details of that but it's generally the case that there's a small, grey man behind the scenes and they pick front men who are bright enough to be plausible to outsiders but not bright enough to be a threat to the grey guy.

Rubin wasn't even a string puller at Citigroup. He was basically an in-house celebrity, who was particularly popular in Asia, so Citi would send him there on glad-handing trips.

I guess Rubin gave off a whiff of the late '90s economic boom he was partially credited for, but the post-2008 bust he and the rest were caught flat footed by suggests they got too much credit for the boom.

In reality, Rubin had one clever, though strikingly illiberal policy idea: lower tax rates on capital (I.e., the mobile wealthy) while raising them on income (the working rich salarymen). That added a bit of fuel to the dot-com bubble, in which everyone got equity, and it may have strengthened the dollar a bit, which contributed to lower energy prices, but most of the boom came from tailwinds Rubin & co. didn't foresee or create:

- the oil bust: oil prices touched $10 per barrel in the late '90s, which meant lower gas prices, which acted as a econ stimulus.

- Mortgage equity withdrawals. These had an even bigger impact during the Bush years, but see the chart here for an estimate how much of reported GDP was fueled by them.

- The dotcom bubble, which coincided with the blow-off top in the secular bull market in stocks that had started in 1982.

Incidentally, this didn't get much play in the US, but former Aussie Prime Minister Keating Paul Keating said Geithner's actions during the Asian financial crisis of the late '90s planted the seeds for the global crisis of 2007-2009.

I don't understand your antipathy towards Millken- I too read 'Predators Ball' and every other book written about Millken and don't see what he did that was wrong or worthy of approbation. Either then or now.

Bonds that are high-yield are so because of the perceived risk of owning same. Ok with me if The Market demands a higher return for what is evaluated as a riskier investment. Nothing wrong with that, right?

Junk Bonds, despite the pejorative, financed companies like Turner Broadcasting and T-Mobile. Lots and lots of other name-brand companies as well-

The 80s buyout cycle? Enabled by but a different thing (with different issues) I think- Separate discussion, please-

And although I'd like to think a Space Reptile has (had-) a plan I don't think Millken, during the 80s, had one. I think he saw a market opportunity and made it work. I think he DOES have a plan now and near as I can tell that's making the world a better place by focusing on Education and (separately-) cancer research. Millken raises money and executes work without gov't largesse being the object.

And- Before you mention his federal conviction I would urge you to consider how unbelievably shaky Insider Trading laws are. Just ask Mark Cuban (excellent mention of same at blogmaverick.com). For the life of me I can't understand why Millken didn't fight the SEC harder.

Are The Banks and The Traders going to kill The Economy? Yes. And for all of us- Privatizing profits while socializing losses makes for horrifying incentives. Read 'Liars Poker' by Michael Lewis- Has the Gov't enabled these incentives by permitting public companies to work with so much leverage untempered by the personal accountability inherent in private ownership? Yes.

But that's not Millkens fault. I can't tell that he's part of that game now-

And I don't understand your antipathy towards Michael Millken.

Don't know him, don't work for him, never met him- But I admire the guy.

I saw Geithner give a speech last year and he said he was faced with people who wanted to nationalize everything (the liberals) and others who wanted to let everything fail (libertarians/conservatives). He said the right approach was in the middle.

This 'goldilocks' method is the #1 standard technique of bureaucratic rhetoric. 'Sir, we have three options. The first is very extreme in one direction. The third is very extreme in the other direction. I recommend the middle option, which is extreme in no direction and is a judicious compromise'.

There is a lot less difference between letting an entity fail and go through typical bankruptcy, nationalizing them, and bailing them out.

In all three cases, the owners of the company .. shareholders lose all or 90% of their equity.

Typical bankruptcy is not a good option during a financial meltdown. It takes too long and further freezes markets.

Nationalization would put the banks in the same position of the GSE's. They would have been heavily pressured to both raise lending standards -- and under incredible political pressure to lower them. In addition, it has some similarities to the US actions in Iraq -- trying to completely rebuild a society while disbanding all institutions that are a source of stability.

Outside of a financial crisis -- I don't see any reason to do bailouts .... just bankruptcy, as normal firms do in normal times.

In the crisis, banks representing 20% of insured deposits were either seized by the FDIC, forced into mergers by the FDIC, or bailed out in such a way to wipe out roughly 90% of shareholder equity.

All banks seized by the FDIC totally wiped out owners/shareholders. Banks forced to merge wiped out 90% of shareholder value.

The shareholders of AIG lost 92% of their equity. Citi -- 90%. Bank of America roughly 75% -- after they were encouraged to merge with Countrywide and Merril Lynch. Without those mergers, Bank of America would not have needed an extensive bailout.

GM? They did go through bankruptcy. But since it was in the middle of huge financial turmoil, were treated in a way that was more advantageous to so called 'stake holders' ... suppliers and workers. No other country in the world would let its largest auto manufacturer to fail without government intervention. Once again, shareholders were 100% wiped out.

As far as other large banks receiving TARP funds, all of them paid back their loans fairly rapidly -- with interest and warrants. The Treasury made money on the 'bailouts' of financial institutions.

How do I know that shareholders/owners were wiped out? Because I lost a non trivial amount of money on the 'bailed out' firms.

Another argument about the 'evil' nature of the bailouts is that the counter parties received a windfall. The people they did business with didn't bring them down. This is the sole intent of a bailout. To stabilize the financial system.

The real mistake was to let sluts like Elizabeth Warren define the argument. And the ignorant dickhead Neil Barofsky, inspector general of SIGTARP. The Treasury could have heavily publicized the fate of shareholders of distressed banks that were bailed out. And they could have could have heavily publicized the repayment of TARP at a profit.

Unfortunately, Warren and Barofsky aggressively attacked all aspects of TARP in a way that is absurdly misleading. If anyone wanted to, they could go back to the frequent press releases and reports of SIGTARP that misrepresented the financial status of TARP for four years. It was obvious that TARP would roughly break by mid 2010. Warren milked this misrepresentation to her current political career. Barofsky wanted to make a reputation but was unable to find any crime and left to bloviate.

The end result of this is that the Democratic Left will never shut up about this. And the Republican's had to face up to the failure of markets under extreme stress. The latter caused a void filled by Tea Party. The last time it was considered a great idea to let markets clean up a serious financial crisis, it took WW 2 a decade later to get close to even.

"Are The Banks and The Traders going to kill The Economy? Yes. And for all of us- Privatizing profits while socializing losses

...

But that's not Millkens fault. I can't tell that he's part of that game now-

And I don't understand your antipathy towards Michael Millken."

The US economy is hanging by a banker's thread because the other 90% of the economy was off-shored because it was the only way to prevent the hostile takeovers and asset stripping made possible by ...junk bonds.

Thanks for the link Steve. The '90s dereg, bailout and cap gains slashing set up the excess of the '00s, but the media cannot talk about it because it happened under a Democrat POTUS and the media didn't say a peep.

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